Opportunities overseas

Just as overseas firms have been scrambling to draw up plans for tapping into China’s huge potential, so too have domestic enterprises begun to embrace opportunities abroad. Turning a profit means a cross-border search for expertise and established brands – as well as massive amounts of resources to keep the breakneck growth of recent years steaming ahead.

The political tensions that increasingly arise in response to the presence of Chinese money and influence overseas have not dampened Beijing’s ambition. "There is no doubt that overseas investment will keep on growing," said Allan Zhang, associate director of transaction services at PricewaterhouseCoopers in Beijing. "I would say the demand is strong and Chinese companies are all very keen, either public or private."

Overseas investment from Mainland firms reached US$6.92 billion last year – a mere fraction of the US$60 billion in 2005 inbound investment – but still an increase of 25.8% on 2004, according to the Ministry of Commerce statistics. Equity investment accounted for 58.8% of FDI with reinvested earnings making up the remainder.

Mergers and acquisitions accounted for more than half of equity investment – US$2.3 billion – with the rest funding new production facilities. The major M&A deals all reflect Beijing’s relentless drive to secure energy and resources from abroad. Top of the pile was China National Petroleum Corp’s (CNPC) US$4.2 billion purchase of Canadian-owned PetroKazakhstan for US$4.2 billion last August. This was followed in January of this year, when China National Offshore Oil Corp (CNOOC) took a 45% stake in Nigeria’s Akpo oil and gas field for US$2.3 billion.

The size of these acquisitions – CNPC’s purchase was the largest cross-border oil and gas deal of 2005 – shows how far China has come. Until the early 1980s, outbound FDI comprised assistance for developing nations and wealthy individuals’ forays into the property markets of Hong Kong and beyond in order to move capital away from the Mainland’s legal and political uncertainties.

Out and about
But since the so-called "Going Out" policy announced in 2002 Chinese companies have become more and more proactive in investing overseas. And they are not squeamish when it comes to dealing with nations that are under diplomatic pressure. At the end of 2004, Iran signed an agreement to supply China with liquefied natural gas for 25 years from 2009. The deal could be worth US$100 billion and also permits Sinopec to help develop one of Iran’s largest oilfields. Further agreements are likely despite the recent tension over Iran’s nuclear program.

"Many companies are very strong in their desire for overseas investment, mainly targeting the developing countries," said Zhang. Chinese firms are familiar with emerging markets – this means they can maximize their influence and even use them as bases from which to eventually tackle developed markets.

Despite this emerging market bias, though, there is still an interest in developed economies. The Austrian Business Agency (ABA), part of the Federal Economic Chamber, set up a representative office in Shanghai in January – its third overseas after New York and Tokyo.

As China has become Austria’s biggest trade partner in Asia, the government-operated consulting body is keen to extend ties to include investment in Austrian firms, which is currently negligible.

"China is booming," said Christoph Plank, vice consul at the commercial section of the Austrian Consulate General in Shanghai. "Companies, especially multinationals, can’t wait to get more international, to leave China’s borders. The aim of ABA in Shanghai is now to get in contact with promising Chinese companies that are interested in setting foot in Europe."

Target sectors
The ABA office has five initial target sectors – IT, a renewable energy known as biomass, real estate, logistics and sports. Plank is particularly keen to present Austria as the prime hub for doing business in Eastern Europe. With traditionally close ties to the emerging region, Austria is a potential base for Chinese companies’ distribution centers and can provide banking, management and tax advisory services.

In 2005, ABA as a whole facilitated 123 investment projects with worldwide investment worth US$263.1 million. But Plank declined to forecast what level of investment Austria was likely to enjoy from China. "We are still in a project phase," he said. "This is the very first phase to set up all contacts and framework of the ABA in China."

Energy aside, a prime target for Chinese outbound investment in the coming years is likely to be brands. The country has few national names that can perform on the global stage – and buying is much quicker and easier than nurturing from scratch. It can be argued that Lenovo paid US$650 million in cash and US$600 million in shares for the IBM brand, rather than the loss-making PC manufacturing arm’s tangible assets and technological know-how.

A similar logic lay behind Nanjing Automobile’s surprise buyout of bankrupt UK car maker MG Rover in July last year. With growth in the domestic auto market slowing, Chinese manufacturers are desperately keen to sell their cars to the West. But they face major obstacles as they strive to emulate the global recognition of Toyota and Hyundai, such as substandard quality and a lack of design expertise.

In Rover, Nanjing Auto has a badge that will sell, while the defunct UK manufacturer’s international expertise and first rate technology are also at its disposal. "The MG brand is famous and we are proud to project it into an exciting future," Nanjing UK Chairman Wang Hongbiao said in February after the firm took out a 33-year lease on Rover’s Longbridge site with a view to restarting production.

State-owned enterprises may still be leading the way with their high-profile buyouts, but it seems more small private firms are preparing to get in on the international action. As China’s outward momentum gathers, so will the far-reaching political implications of each transaction.

Chinese money was turned away from the US last year when CNOOC withdrew its US$18.5 billion offer for oil and gas firm Unocal Corp after sustained political attacks. But for how much longer will the US – or Southeast Asia for that matter – be able to withstand the intensity of the Chinese shopping spree?

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